The Royal Commission into the financial sector has the most ironic name. When you think about it, the bad behaviour revealed from the ‘star’ financial players, who have covered themselves in infamy forever, did it all for COMMISSIONS.
And it has been ‘right royal’ commissions that have always been at the core of the financial advice industry’s problematic underbelly.
One tragedy of this overdue revelation into how financial planning has worked (or not worked) is that there are still advisers who are actually good eggs, who don’t deserve to be tarnished with the same brush as the bad eggs.
A small part of my business is financial planning. It’s small for two reasons. Firstly, we started the business because as someone in the media who was teaching everyone about money, I was continually asked to give friends and followers advice.
At this time I’d didn’t have a financial licence to give advice so I’d refer my friends to someone I knew reasonably well but always cautioned them to come back and tell me if they ever felt uncomfortable with any of the advice given. To be honest, this was a long time ago and I didn’t truly understand back door commissions etc. etc.
Also around that time, my wife, Maureen and I wrote the Aussie version of the US book The Complete Idiot’s Guide to Getting Rich. In doing research for case studies for the book, Maureen was so often asked by people who didn’t know her but liked her voice and apparent sincerity “Will you look after my money for me?” Naturally she told them she couldn’t but it quite astounded us that people were so desperate for financial advice that they’d be guided on a hunch around trust.
The second reason we have remained small is that we didn’t do financial planning lucratively. From the outset, we rebated commissions and charged flat dollar fees, so we could avoid the reputation loss of being too greedy and ending up in a Royal Commission. And it seemed like the right thing to do but it did mean we found it hard to attract high powered advisers because they wanted to go a firm where they could build up a big trail of commissions from putting clients into financial products, which would follow them for a long, long time.
In the early days, we actually found it was near impossible to unwind the commissions linked to insurance. The cost of doing it was pretty expensive.
We also learnt that people hated paying for advice. We charged for our services by the hour but we found people actually liked their advice fees to be deducted from their super, no matter how big the slug was. One very complicated customer, who was being charged about $60,000 via a super fund commission to his adviser, didn’t want to come to us because, as he said, “I would’ve had to cut a cheque for $20,000! I don’t notice it when it goes out of my fund.”
This guy was complicated and that’s why his fee was large but at the time we charged most clients $2,000 to $3000 because that’s what they’d pay. But it was very hard to make money on that price point.
Nowadays a planner has to do 10-13 hours of work before a financial plan can be created. Given all the costs associated with the responsibility of doing a plan, and then being prepared to back that advice, $5,000 is a reasonable price for a plan. But lots of people find that price too high.
So it's not easy to run a financial advice business and I’m not even going to go into the time when one bloke who was working for us got his own licence (on our time) and then called our clients telling him he was setting up his own business and succeeded in walking away with some of our clients. Unethical? Yes. Hard to stop? Yes.
Financial planners had to come up with strategies to “increase their share of wallet” as some expert coaches of advisers have referred to it. The Storm financial advisers would get clients to borrow to buy shares and they would add the client’s money to be managed to the borrowed amount and then charge 7% of the total amount. They’d use tax deductions linked to the loan to reduce the total impact on the client to lower the real cost. Of course, the strategy was linked to the client’s home and so a lot of Storm’s clients lost their homes when the stock market crashed and they couldn’t meet their payments. I tried to warn regulators about this but it fell on deaf ears.
I think the only solution that would force all the players in the industry to confront their questionable behaviour is to create a financial consumer claims tribunal, where there are no lawyers. It would be an independent adjudicator. The client would put his/her case and the financial supplier would put up a defence.
In so many cases, the client would win hands down and eventually the management of the financial business would see the accumulating losses from losing out at the tribunal. Money speaks all languages and eventually the leaders of these financial operations would be forced to pass the sniff test.
Also the results from the tribunals would be evidence for ASIC’s ‘sheriffs’ to use to take further action to make sure the industry gets cleaned up.
In such a regime, good and honest advisers would win through — even at the tribunal where maybe the client is wrong and greedy — and we’d eventually create an advice industry that would attract more clients, who really do need help.
If anyone knows the Minister for Revenue and Financial Services, Kelly O’Dwyer, please pass on this story. I know it would cost a lot but the bank levy will raise $6.2 billion over four years, which could bankroll my solution, and it would be a case of the money being put to good use, which would be quite an achievement for any government.
In fact, it might be an idea Bill Shorten might like because when it comes to our money, Bill is an ideas man!